With mortgage lenders tightening their lending requirements, getting approved for a mortgage has never been harder. Conventional mortgage loans remain a popular choice for many home buyers, but if you’re unable to qualify for a conventional mortgage due to down payment and credit score requirements, you might be eligible for an FHA mortgage loan.
FHA home loans are mortgages insured or guaranteed by the Federal Housing Administration. Understand, however, that the FHA is not a bank, nor does the agency issue loans. An FHA guarantee means that your lender will receive funds from the Federal Housing Administration if you default on the loan.
FHA loans are ideal if you have less-than-perfect credit, as well as limited funds for a down payment or closing costs. However, there is a fee for FHA mortgages. Borrowers pay a 1 percent upfront mortgage insurance premium, plus a low monthly fee.
There are no income limits for FHA loans, thus practically anyone can qualify for this type of mortgage. However, there are limits regarding how much you can borrow, which varies by city and state.
Unfortunately, every lender does not offer FHA home loans. While FHA loans are easier to obtain than conventional mortgage loans, there are specific regulations attached to these loans, and lenders must carefully adhere to these regulations in order for loans to be guaranteed by the agency.
Because FHA loans vary from conventional mortgage loans, it’s imperative that you understand the requirements before applying. Because these loans are insured by the federal government, an FHA loan entails a lot of documentation. Be prepared to show bank statements, investment statements, tax returns for the past two years, recent paycheck stubs and a year-to-date Profit and Loss statement (if self-employed).
An FHA mortgage requires 24 months of consistent employment, ideally with the same employer. If you change employment within this two-year period, you must remain in the same line of work. Additionally, your income must remain the same or increase during this two-year period.
The FHA offers relaxed credit score requirements, with many applicants qualifying for financing with credit scores as low as 620. However, you must wait two years after a bankruptcy and three years after a home foreclosure to apply for an FHA mortgage loan. Plus, you can have no more than two 30-day late payments in a 24-month period.
Your existing debts also factor into the approval process, and high balances on credit cards and loans can affect your buying power. When applying for an FHA mortgage loan, the housing payment on your new mortgage cannot exceed 30 percent of your gross monthly income. For example, if your gross monthly income equals $3,000, your mortgage payment cannot exceed $900.
Like conventional mortgage loans, FHA loans have down payment requirements and closing costs. But while conventional mortgages require a minimum of 5 percent down, FHA home loans only require a 3.5 percent down payment. Closing costs can range between 3 and 5 percent depending on the location. However, the FHA does allow sell contributions up to 6 percent of the sale price.